Dear China, About those Solar Tariffs….

January 26, 2018

This week the Trump administration took a decision to raise tariffs on solar cells and modules imported into the United States. The decision was based on a complaint brought under Section 201 of the Trade Act of 1974. As was discussed in a recent Energy 360 podcast on the topic, make no mistake, this was not a finding that China had conducted unfair trade practices; rather, it was pure protectionism intended for a very narrow domestic constituency. A lot has already been said on this decision: (1) the additional tariff imposed was less damaging than it could have been (starting at 30 percent, rather than 50 percent, declining by 5 percent per year the over next four years); (2) by itself the tariff will spur little-to-no new solar manufacturing in the United States and the real growth in the U.S. solar industry is not in manufacturing anyway; (3) utility scale solar will be hardest hit as will the states with new and fast growing solar markets, but impacts will possibly be muted in 2018 thanks to early procurement; (4) the tariffs actually harm the solar industry, one of the fastest growing segments of the energy sector and an important creator of jobs, which is why many members of Congress opposed the imposition of a higher tariffs; and (5) other countries are really unhappy about this because the United States did not seek a remedy through the World Trade Organization, because it goes against basic free trade principles, and because it hits their products (China, Mexico, and Korea have already voiced their disapproval), but it is not expected to have a critical impact on the global solar industry.

One major unanswered question is whether this step strengthens the forecast for a trade war on the horizon—particularly with China—but also what negative impact this could have on the NAFTA negotiations. The prevailing expectation is that China will most surely retaliate, as they did in 2011 when the United States imposed tariffs on Chinese panels and the Chinese responded with a measure against U.S. polysilicon import to China. Still it is plausible that by settling on a less aggressive tariff on cells and modules (plus trying to provide relief to U.S. manufactures who import cells but conduct the last stage of panel manufacturing) the administration was able to thread the needle and show its toughness on trade without harming any of its core constituencies, without causing more widespread damage to the U.S. economy (as would be the case for a tariff or quota on imported steel for example), or angering China with something much stronger. Indeed, many folks are watching to see if this is a potential opening to a negotiated outcome with China on the basket of solar-related trade issues that have accumulated.

Three more things need to be said. First, as the Chinese foreign minister noted in his response to the trade decision, the tariff action “ was also strongly opposed by many local governments and downstream enterprises in the US .” The solar industry was, indeed, divided on this issue when it first arose and worked hard to lobby for a solution that minimized, as much as possible, the damage this could cause to the U.S. industry. But the U.S. parochial economic lens is not the only relevant one to consider. Economic competition and gains are certainly an important part of what drives the promotion of solar development and deployment policies, but another major driver is the global climate challenge. In this light, what China has done over the last decade in driving the cost down for solar has been a significant boost in the global fight to reduce emissions. In many circles, there is a deep amount of gratitude for Chinese contributions to the solar industry and a desire to encourage their innovation and commitment to pursuing further cost reduction, new technology, and mass deployment. It is important to remember this global strategic goal, lest we let competition overshadow strategic objectives. This does not mean China gets a pass on anticompetitive trade practices in areas where its making a positive contribution to climate change of course (see the recent ruling on Chinese intellectual property rights (IPR) theft in the wind turbine industry for example). But it does mean that self-inflicted wounds of protectionist measures run contrary to more than just good global trade hygiene.

Second, it will be interesting to see whether this action elicits pro-solar states (i.e., states that were already experiencing or most likely to experience benefits from a growing solar industry) to respond to the tariff decision. The economic and political bar to creating greater support for solar through higher renewable portfolio standards, feed-in-tariffs, solar carve outs, or new grants and incentives is high in some places. Yet again, this is the perfect opportunity to show that states play an important role in determining the energy future of the United States, so a message sent to the world that states do not want to harm the growth prospect in solar could be quite powerful. Such a counter action does not necessarily need to be directed against the Trump administration either. One could imagine, whether through an upcoming infrastructure package or through other government mechanisms, that states and the federal government could use this as a launching pad to support solar manufacturing or other promising portions of the solar industry in the United States in ways that help boost our competitiveness for the future.

Third and finally, the ripple effects from this decision could have other impacts on the energy sector. Putting the more consequential Section 232 steel and aluminum import and national security decisions aside, lots of companies from all sorts of industries could see this as an opening to put forward their claim of damages and need for relief before the International Trade Commission. At present, all segments of the energy industry should be scouring their supply chains for such potential complaints and assessing the impact of a potential protectionist decision.

Sarah Ladislaw is a senior fellow and director of the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).